US NATURAL GAS PRICE ARCHITECTURE (c) Leo Haviland, July 11, 2013

What is the near term outlook for United States natural gas prices (nearest futures continuation)? They probably will retreat further from around the ceilings reached in mid-April to early May 2013. A 20 percent decline gives around 356, rather close to the 6/28/13 low at 353. However, assuming normal weather, a breach of 350 probably will be modest. Some support exists around 328, the 7/31/12 high; important support exists around the 305/310 first quarter 2013 level. The most likely time for at least an interim bottom is late August to calendar September 2013.

Why remain somewhat bearish on US natural gas for the near term? After all, natural gas clearly constructed a major low around 190 on 4/19/12, and that floor probably will not be broken anytime soon. Also, US gas inventory in days coverage terms at end October 2013 from the long run (1990-2012) perspective probably will be only slightly above average. Moreover, perhaps the desired levels of natural gas inventory holding have shifted upward in recent years. This is by no means certain, though. In any event, if one selects the 2006-12 horizon as the relevant one, then end October supplies fall modestly below this revised average.

Nevertheless, even if marketplace engineers adopt the 2006-12 vista as the most relevant one for inventory analysis, natural gas stocks at end winter 2013/14 draw season probably will be moderately high relative to average in days coverage terms. In addition, the noncommercial long position in natural gas that helped to propel prices to their spring 2013 heights, though it has slumped in recent weeks, remains substantial. Its liquidation will pressure prices. Despite the neutral (or even slightly bullish) inventory situation in days coverage terms for October 2013, the American supply/demand situation from the production and consumption trend perspective for 2013 (at least the past few months and “nowadays”) and (especially) 2014 on balance is slightly bearish. Demand from the key electric power sector arguably will not jump up in the near term unless prices sustain falls under 350. Notable US LNG exports remain a prospect for the relatively distant future. Overall US electricity consumption growth remains mediocre.

Over the mystical time horizon called the long run, assuming normal weather and moderate American economic growth, the longer run natural gas trend probably is sideways. The broad range stands from roughly 280/310 to 490/520.

Natural-Gas-Chart-(NYMEX-nearest-futures)-(7-11-13)

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Natural Gas Price Architecture (7-11-13)
Natural Gas Chart (NYMEX nearest futures) (7-11-13)